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From smartphones to smart cities

31 July 2020

7 minute read

By Julien Lafargue, CFA, London UK, Head of Equity Strategy

Smartphones have radically changed behaviour while generating vast amounts of data. The rise of smart cities and interconnected devices looks set to produce more data, change production methods and help battle climate change. In turn, creating attractive opportunities for businesses and investors in coming decades.

Although there is some debate as to when the first smartphone was released (IBM’s Simon Personal Communicator in 1994 or Apple’s iPhone in 2007), since then this market has experienced tremendous growth.

While it took colour televisions close to 40 years to reach almost every single household in the US, it took smartphones just about 10 years to achieve a similar level of penetration.

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As a result, according to researcher Statista, globally, more than 3bn smartphones are in use today and by 2025 72% of all internet users are expected to solely use smartphones to access the internet, predicts the World Advertising Research Center.

But phones are not the only object to have become “smart”. Over the last 10 years, everything from cars to appliances and from notebooks to cities have been dubbed smart. The main factor allowing our surroundings to develop a form of intelligence has been the relentless improvement in connectivity.

Connecting devices and the promise of 5G

While the first generation of mobile networks (also known as 1G) could only transmit at a rate of 2.4 kilobits per second (kbps), today’s fourth generation networks allow us to stream video at speeds that are 40 thousand times faster. 5G, which is set to be rolled out globally in the coming years, will allow a further tenfold increase in transmission speeds while reducing latency – or the usual lag experienced by users – to just one millisecond (vs. 50ms with 4G). This is, in many cases, faster than what is achieved via a traditional wifi network.

This increase and improved connectivity means that by the end of this year, more than 20bn devices may be connected in what is now referred to as the Internet of Things (IoT). Within 10 years this number could be multiplied by 10, claims Cisco. But the IoT may only be the tip of this gigantic iceberg.

Indeed, once connected, all these devices have the potential to revolutionise the way we live. This is because with connection comes data and with it knowledge that was until now inaccessible. If put to good use, this information won’t just enable us to switch off our lights from our phones, it could change the way we learn, communicate, move, produce, heal or build.

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Smart cities

At the heart of this revolution lies smart cities. Urban areas concentrate around 85% of global economic activity, according to the World Bank, a number that is set to increase as the world’s population keeps growing. Cities are complex ecosystems, touching on most aspects of our lives. They also need modernisation to be able to cope with increasing demographic pressures, both societal and environmental.

This means that not only buildings need to become smarter but the infrastructure surrounding them as well, as the way people move in and around them needs to evolve too.

Within smart cities, economic production will also change. Indeed, both manufacturing and services will be more connected. In factories, production lines which have relied increasingly on robots to perform repetitive tasks, are becoming fully automated and able to monitor, adjust and sometimes repair themselves. This revolution, often referred to as the “industry 4.0”, will likely have far-reaching implications: workers will need to develop new skills and consumption patterns could change as hyper-customisation becomes the norm.

Similarly, services which were traditionally seen as “people businesses” have started to replace social interactions with digital ones. You can now book a trip, open a bank account or do your weekly grocery shopping without having to interact with anything other than your mobile phone. Even governments, the single largest provider of services, are increasingly relying on technology to perform their core tasks such as ensuring public safety or granting access to energy or healthcare.

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Vast data-sharing opportunities

US-based Zion Market Research estimated that the total smart city market would reach $2.7 trillion by 2024, more than 10% of the US economy

The opportunities emerging from a smarter world are countless and putting numbers around them is difficult. In 2019, US-based Zion Market Research estimated the size of the IoT market in smart cities. According to their projections, this slice of the overall pie could grow from $79bn in 2018 to more than $330bn by 2025, a 23% compound annual growth rate. In a previous study, they found that the total smart city market would reach $2.7 trillion by 2024, more than 10% of the US economy. But this does not necessarily include the externalities associated with developing a smarter world.

Indeed, a key tenet to building a smart world is the willingness for users to share information. Without this critical piece, the myriad applications just discussed might disappear. In this context, the comfort brought by more efficient processes may be a strong incentive, but the desire for privacy appears even stronger. As such, the demand for cybersecurity will also likely grow exponentially while regulators will need to adjust the legal framework to avoid abuse and promote confidence in the system.

At the same time, the transition to a smarter world can’t be done without consideration for other key challenges faced by the human race, chief among which is climate change. A smarter world can be more efficient, frugal and sustainable and so could help to tackle environmental risks. Yet, it could also significantly contribute to green gas emissions.

Indeed, data centres, the brain of the smart world, produce the same carbon footprint as the entire aviation industry. While more efficient alternatives are being developed, this highlights the need to consider the whole picture and not just the growth potential.

Rich hunting ground

From an investment perspective, the theme of “smart everything” is a vast and varied hunting ground. As we’ve eluded to earlier, almost every single aspect of our lives could be impacted by this transition which is likely to take place over years if not decades. As such, we would expect various sectors to be impacted in waves rather than all at once.

In this context, we believe that one should take an active approach, identifying the sub-themes that are most relevant at a particular point in time.

Many people may “drive” autonomous electric cars one day, but currently the communication network is just being laid out so as to allow fast enough data transmission to make sure such car won’t crash at the first junction. And between now and then, many other factors will continue to influence the performance of all the companies involved in the automotive value chain. In order to successfully benefit from the transition to a smarter world, we believe it’s important for investors not to ignore these macro and micro considerations.

Similarly, because we still in the early phase of this paradigm shift, many pure-players may still be loss making or privately owned. As such, investors that want to participate in the digitalisation theme should be willing to make some comprises by either taking the long view, and commit capital to private markets, or tolerating that their exposure to the theme might be diluted when investing in certain established companies.

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See beyond: thematic investing

The pandemic may be most on investors’ minds for now. But a series of long-term, structural megatrends are likely to have a larger impact. Our investment experts look at the impact globalisation reversion, demographic shifts, building a sustainable world and the pending revolution in “smart” everything may have and how you may profit from them while making a difference to the world.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

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